We’re Too Old For This Recession

The outcome of the 2012 election may well depend on the unemployment rate in November.  President Reagan was re-elected in 1984 when the unemployment rate was 7.2%, but Presidents George H.W. Bush and Jimmy Carter were defeated when unemployment rates were 7.4% and 7.5% respectively.

It is misleading to compare today’s unemployment rate to the rate 30 years ago because today’s labor force is older and more experienced.  The unemployment rate was high during the early 1980s in part because many baby boomers were in their 20’s when unemployment rates tend to be high.  The declining unemployment rate in the late 1990’s and early 2000’s was aided by baby boomers entering their prime working ages.

Voter sentiment in November may depend on whether unemployment rates by age group are unusually high.  To make this comparison, I calculate an overall unemployment rate that holds constant each age group’s share of the labor force.  Using this method, I find that age adjustments increase last month’s 8.5% unemployment rate to 9.1%, while the “age-adjusted” unemployment rates when Carter, Reagan, and George H.W. Bush faced re-election were 6.8%, 6.8%, and 7.5% respectively.

Unemployment rates in the early 1980s were “inflated” by young baby boomers entering the labor force.  Although last month’s 8.5% unemployment rate is high by historical standards, it would be even higher if it weren’t for all the baby boomers now in their 50’s and 60’s (when unemployment rates tend to be low).  A worker today faces an unemployment rate that is 2.3% higher than someone the same age faced in November 1980.

This means that the recession of 2008 is even more severe than we first thought.  The unemployment rate has averaged 8.4% over the past four years which appears lower than the 8.6% average rate during the 1981 recession, but really isn’t.  In fact, the average “age-adjusted” unemployment rate over the past four years is 8.9%, which is much higher than the average 8.1% adjusted rate during the 1981 recession.

The following graph compares unemployment rates for five recent recessions and recoveries, after adjusting for workers’ ages.  It is clear that the 2008 recession has been the deepest and longest downturn in decades.  The “age-adjusted” unemployment rate exceeded 10% for 19 straight months in 2009-2011 and remains stubbornly high.

There is no doubt that the 2008 recession is more prolonged and severe than any economic downturn since the Great Depression.  The current 8.5% unemployment rate is high by historical standards, even if I don’t adjust for the graying of the labor force.  I find that the “natural” rate of unemployment for today’s relatively experienced labor force is about 1.2% lower than it was in 1980.  Therefore unless the unemployment rate in November 2012 is 6.3% or less, voters will face a higher unemployment rate this fall than voters the same age faced when Ronald Reagan defeated Jimmy Carter.

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